Types of Boards of Directors: Advisory and Fiduciary Boards

What is the Difference Between a Fiduciary Vs. Advisory Board of Directors?

By Mark Robert Richards

The board of directors serves as the heart and mind, steering it through tough and good times and making strategic decisions that will affect its future.

A higher functioning board of directors delegates the bulk of its work to committees, each with a different area of expertise or focus. The type of board depends on the business’s structure and requirements concerning corporate governance.

Fiduciary Board

The fiduciary board of directors is a prevalent board type and has the most duties.

More often these days, an independent person is the board chair and is responsible for leading the board of directors and providing oversight of the CEO with assistance from the other board members. The fiduciary board of directors focuses on setting the company’s mission, vision, and strategic direction with close coordination and buy-in by the senior management team and family business owners.

The fiduciary board makes sure that the company’s strategy is well-aligned with its values, mission, and vision. As importantly, they take steps to ensure that the organization will be able to keep operating in the future by assessing operational, financial, and other business-related risks. As part of its duties, the fiduciary board also creates company policies and procedures, approves financial and capital investment transactions, and sets meeting dates.

The fiduciary board will also focus on senior leadership succession plans and is responsible for hiring and firing the CEO. The fiduciary board must assess if the senior management team and board members have the appropriate skills to deliver the strategic plan. If not, they work through committees to determine the needed skills and find the right people.

The fiduciary board also acts as a link to shareholders by updating them on activities at the company. Fiduciary board members typically stand for an annual election by the shareholders. Board members agree to at least a three-year commitment if reelected each year for continuity purposes.

Because of their oversight duties, fiduciary boards typically have members with diverse backgrounds and expertise. In addition, the board ensures that employees’ interests align with those of shareholders and other stakeholders. Fiduciary boards, by definition, have legal obligations, so companies deploying such boards must carry appropriately sized D&O insuranace policies to attract talented independent board members.

Advisory Board

An advisory board of directors is what a company needs if it wants a more hands-off approach to top-level management.

Advisory boards typically consist of members with related industry expertise and offer strategic advice. They are essentially there as a sounding board for the family business owners. They are not responsible for developing a business strategy or providing any oversite of the company’s operations. Instead, they provide insight and connections that can help the business grow.

Advisory board governance might be suitable for a company if:

  • It wants access to more profound industry knowledge provided by related industry professionals
  • It doesn’t yet feel comfortable installing a fiduciary board with its broader scope of operation and higher costs.
  • It wants to add diversity of thought and ideas to the family business owners and management team.

Advisory board members do not have fiduciary risk since they lack oversight responsibilities. Consequently, a downsized D&O insurance policy is sufficient to attract board talent and protect management. In addition, if the family business owners also operate the company, then the need for a D&O insurance policy is further reduced.

Advisory board members typically serve at the pleasure of the family business owners, and formal, annual election processes do not exist. A family business owner considering an advisory board should promote some recruiting and retention structure to its advisory board process to attract seasoned talent.

Summary

By understanding the difference between a fiduciary and advisory board and how they each operate, a business owner will better grasp what is needed. The Meade Street Advisors team of consultants has deep experience designing and setting up both types of boards of directors and is available to guide owner-operators through the process.

Contact the Meade Street Advisors team today with any questions regarding working with and managing a board of directors.

Mark Robert Richards is the retired Chairman and CEO of Appvion, Inc., headquartered in Appleton, WI.

Mark is now President of Meade Street Advisors, LLC, board governance, executive coaching, and strategic planning consulting business headquartered in Fort Lauderdale, FL.

You can reach Mark at:

Email – mark@meadestreetadvisors.com
LinkedIn –www.linkedin.com/in/markrrichards